FINANCIAL SERVICES BLOG -- MICHAEL McKEOWN

Debt ceiling debacle

Blog Entry: January 17, 2013 4:30 AM | Author: MICHAEL McKEOWN

Michael McKeownMichael McKeown is director of research for Aurum Wealth Management Group. He is responsible for leading the firm's investment research on capital markets, investment managers, and the proprietary Ultra Modern Portfolio Theory.

Since 1944, America's debt ceiling was increased 94 times! Usually just a formality in Congress now seems like awful theatre.

Nearly 18 months ago, I penned observations on the last debt ceiling debate. Not much changed since July 2011 and with today's similar discussion, I will admittedly recycle the three major points I had then and have now. (Note: With clients and friends on both sides of the political aisle, we base research on empirical evidence and not to prove anyone right or wrong.)

Not Worried About Payment

This is about willingness to pay, not ability.

But isn't the US turning into Greece, you say? Sorry, but that is apples and oranges. Greece gave up its monetary sovereignty when it gave up the drachma and joined the Euro currency, ceding authority to the European Central Bank. Greece is to Europe as Wyoming is to the United States. Greece is a currency user, just like the state of Wyoming when it issues debt. In contrast, the US federal government is a currency issuer (BIG difference here) and always has the ability to supply currency.

Unsure About Credit Rating Impact

In the late summer of 2011, capital markets felt reverberations as S&P downgraded U.S. government debt. Interestingly, the securities that were downgraded (Treasuries) actually went up in price when a rating agency said default risk increased. Odd how that worked out…

It is dangerous to base today's expectations on this one sample, but Fitch and Moody's made the same threat of late. The last several months of headlines distracted from the robustness of the US economic recovery, yet a downgrade of US government bonds, the risk- free pillar of capital markets, is not welcome. It could have repercussions across other asset classes as Treasuries form the base for capital asset pricing, or it may not. This is an unknown.

Worried About Tone of Austerity

It seems unnecessary to prove another time that extracting money from the private sector, through increasing taxes or less expenditure, puts the economy in a worse place. Growth gets lowered (note that economists uniformly lowered growth expectations due to the fiscal cliff) and debt to GDP ratios end up worse off afterwards (please see Greece, Spain, Italy today versus 2010, even though budget deficits actually fell). It didn't work for the US economy in 1937 when Roosevelt raised taxes and slowed spending and does not help today.

The theatrics of this debate would be comical if it wasn't tragic. Without Washington's worst efforts causing collateral damage to the real economy, a virtuous cycle of growth might begin, bringing more prosperity to the private sector.

Reader Comments

Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Crain's Cleveland Business. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification. Comments may be used in the print edition at editorial discretion.